Art funds – a beautiful investment
Passion investments are becoming more and more popular because of their positive impact on portfolios. But there is another side to the coin: the risks surrounding collectible assets are numerous. These risk management aspects in passion investments were highlighted at a conference in Luxembourg organised by the Professional Risk Managers’ International Association (PRMIA). This conference, under the patronage of Luxembourg for Finance, was the third in a series of conferences on passion investments in 2010, after an initial one in Luxembourg in September and another one in Paris in October.
For risk managers, collectible assets are a challenging business. They have a positive impact on portfolios, because these assets add to the latter’s diversification. Another reason to include collectible assets into a wealth manager’s strategy is that art can be used as collateral. Deutsche Bank, for instance, is backing up 400 million USD of its exposures in art. Nevertheless, the risks surrounding passion investments are numerous, so that proper due diligence is an absolutely necessary condition. Not only theft needs to be insured against, but also accidental damage.
This is highly important when it comes to insuring art pieces, because 52% of all losses are due to accidental damage. Risks like liquidity, physical risk, storage, transportation, forgery and fraud make this type of fund more difficult for risk managers to handle than non-collectible funds. Even legal risks, like the export of cultural goods, for example, must be assessed. In addition to the above risks, legitimation for reselling art, connected to tax and transparency risks - especially when it comes to loot - make art funds a hot potato.
To minimize the valuation risk, art funds like the London based The Find Art Fund Groupcan rely on a number of high profile art historians and academics to value the chosen works. In her presentation, Rhea Papanicolaou, Art Advisory Associate and Head of Press of The Fine Art Fund Group, highlighted the success story of their funds. The oldest fund was launched in 2004 and has since achieved an annualised return on assets sold of 33.5%.
Adriano Picinati di Torcello, Senior Manager at Deloitte and one of the Luxembourg specialists in this area, pointed out that beyond all risks, there are four main reasons why art can be an alternative asset class. The first one is the size of these markets. Art markets include not only paintings, but also other collectible assets like wine, watches or furniture. Due to the globalization, these markets are growing globally.
Indeed, China today is number three in global art markets with 14% of the market share in terms of sales. With a growth rate of 8%, these markets develop especially in emerging regions like the Middle East. Companies like The Fine Art Fund Group took note of this trend and now offer “The Middle Eastern Fine Art Fund”, or a “The Chinese Fine Art Fund”. Currently, over 100 funds that invest in collectible assets are in development worldwide.
Improvements in research and the development of databases are another reason, why the art market became more and more attractive and transparent over the last years. The Internet offers more information about performance and risk associated with the art market, and the development of indices contributes as well.
Third of all, a growing population with increasing disposable income means that a great deal more people are interested in the market and consider it as a real alternative to classic investments. In 2003, customers from 36 different countries invested in passion investments. In 2007, the number of customers increased to 54 countries and the numbers of customers tripled. This created a huge inflow of money in these markets.
Finally, people nowadays have a much more sophisticated view of art, not only on the aesthetic side, but also on the investment side of it. Besides an aesthetic return, collectible assets offer a financial return. For wealth managers, this development creates new opportunities to diversify their portfolios.
Miriam Mascherin, Managing Partner at Elite Advisers, is convinced that passion investments are a real opportunity for the Luxembourg financial centre to position itself in a new niche. Her company recently launched a fund that invests in precious watches, and has been very successful with its wine fund Nobles Crus since 2007.
The fund operates like a Luxembourg SIF. As a secondary effect, business opportunities in other sectors like logistics, tourism and the cultural sector benefit from the art markets, given that art funds exhibit the pieces in their collection. As Mascherin points out, clients need to accept that passion investments are long-term investments that need time to grow. In case of the wine fund, this is to be taken quite literally. EK